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Daily update

  • Economists rarely descend from their Olympian heights to consider financial markets, but a reminder of economic fundamentals may be due. 2022 is a year of reaction to 2021. Last year saw perhaps the strongest demand surge for goods in 75 years. This year is about normalization. The important point is that we still have a strong level of demand.
  • Inflation will also normalize over time—and the cost of living of many people is lower than headline consumer price inflation (giving more spending power than is popularly supposed). Nonetheless, liquidity is not needed in the way it was, so quantitative policy can be ended. Interest rates do not need to slow economic growth (that will happen regardless of central bankers) but could move to more normal levels.
  • Political risk sometimes matters, and sometimes does not. Reports of China’s “spring clean” of the internet worried tech investors, sensitive to the country’s regulatory process. The Ukraine tensions persist. But UK Prime Minister Johnson’s conga line of rule-breaking accusations and “let them eat cake” defence are not market important at all.
  • UK public sector borrowing was revised lower, a reminder that economic activity (thus tax revenues) may be better than first thought. The German ifo business sentiment opinion poll is due.

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